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ight out of 10 banks (89 percent of total bank’s sector market capitalization in the Jakarta Composite Index) have published (as per July 31) earning results in second quarter (Q2) this year except Bank Tabungan Negara (BBTN) and Bank Pembangunan Daerah Jawa Timur (BJTM) which underwent limited review. Most banks reported in line Q2 earnings and few above market expectations, with upside surprise coming from Bank Mandiri (BMRI) due to marked-to-market derivative gains.

Improved Q2 earnings were backed by higher Q2 Net Interest Margins (NIMs) to 7 percent vis-à-vis 6.6 percent in Q1, except Bank Negara Indonesia (BBNI), on lower cost of funding and improved earnings assets mix on loans; while some banks like BMRI, Bank Tabungan Pensiunan Negara (BTPN) and Bank Pembangunan Daerah Jawa Barat dan Banten (BJBR) aggressively penetrated into high-yielding micro loans.

On the funding front, Bank Central Asia (BBCA) and BMRI unloaded their time deposits by cutting rates as excess funds applied pressures on margins. These higher NIMs combined with improvements in fee-based incomes allowed aggregate operating income to grow 6.5 percent quarter-on-quarter and 18.4 percent year-on-year.

Notable was the major improvements in fee-based incomes for BBNI (22 percent of Q2 total fees) and Bank Bukopin (BBKP: 36 percent), stemming mainly from credit cards. On the cost side, limited provisioning helped to offset increased personnel and overhead costs arising from branch openings across all banks.

On the balance sheet side, the eight banks had average loan growth of 8.1 percent quarter-on-quarter, bringing year-to-date loan growth to 10.2 percent and translating to 24.5 percent year-on-year growth.

As on May, the central bank revealed the sector’s average loan growth of 26.7 percent year-on-year, with productive loan growth (29.0 percent year-on-year) outpacing consumer loan growth (+20.2 percent year-on-year), mainly in mortgages (+46.9 percent year-on-year).

BBCA booked the highest mortgage growth of 73.5 percent year-on-year with average ticket price of Rp 506 million (US$53,636) per debtor. As expected, banks with excess liquidity like BBCA and BMRI tended to aggressively grow and remix their loan portfolios; while other banks like Bank Rakyat Indonesia (BBRI), BTPN, BJBR and BJTM stayed focused on their market niches, expanding high-yielding loans, which included micro finance and loans to civil servants and pensioners.

Overall, the sector’s gross Non-Performing Loans (NPLs) were relatively stable at 2.7-2.8 percent while the eight reported gross NPL of around 1.9 percent. Due to fraudulent debts, BJTM indicated a relatively high gross NPL at above 2.0 percent vis-à-vis less than 1.0 percent in recent years.

Although it appears that our banking sector displays promising outlook, supported by nearly one trillion US dollar worth of GDP with 6.1 percent growth and manageable inflation of 4.1 percent, uncertain global economic outlook may pressure trade deficit and produce fragile rupiah/US dollar exchange rate, leading to volatility in liquidity flows.

Additionally, we see risk in lower working capital loans due to the current depressed commodity prices while lower Loan-to-Value effective mid-June could dampen consumer loan growth. Although this lower Loan-to-Value might dampen loan growth ahead, loan quality has improved, preventing potential ballooning in NPLs.

In spite of the aforementioned headwinds, big banks with high liquidity have the flexibility to manage and expand their loan books and banks with their market niches are likely to continue to be the main beneficiaries within their segments.

The writer is the deputy head of research at PT Bahana Securities